Many people are looking for a home loans, auto loans, a consolidation loan or some other kind of loan. Always borrow the least amount possible. Low down payment loans will allow you to conserve cash or replace cash you do not have. They have inherent risks that many borrowers may not be familiar with. Take for example someone who is buying a car and needs an auto loan. Many people are really excited about the new car. They are not really thinking about the terms of the auto loan. Or how much money they want to put down on the loan. These are the typical Low down payment loans that trip many people up. They can cost them hundreds if not thousands of dollars in additional interest charges that they could otherwise avoid.

Low down payment loans – When They are Valuable

A low down payment loan means you have little or no money to put towards the car that you are buying. The only time that this approach should be used is when the interest rate on the car loan is zero and you have somewhere else that your money can be used, saved, invested that will generate more return. Otherwise put as much money down on the car as you can.

This latter approach will have several primary benefits. The car loan monthly payment is going to be lower which makes monthly budgeting easier and you will also pay a lot less interest over the life time of the loan. If the loan is zero interest then it is not costing you anything.

Consumers with large down payments as compared to people with low down payments will usually enjoy a better interest rate. They are viewed as being lower risk and will have a greater probability of meeting their monthly payments. Consumers can save thousands of dollars by avoiding a low down payment, going for a larger down payment and possibly receiving a lower interest rate which saves them even more money.

Our reader who posed the question to us indicated that he currently had a mortgage that was being renewed and that he wanted to increase the mortgage from $75k to $100k. He also indicated that he did not have any other loans or credit card debt. Our reader is employed full time and has been at the same job for the past 6 years. He would like to increase his mortgage so that he can complete a number of renovations to his home next year. He is also considering interest only mortgages for his renewal.

They would like to know whether that this is a good way to proceed or not. Also what the drawbacks would be with this type of mortgage. This is really a two part question: Interest only mortgages and increasing the mortgage to help pay for future renovations to his home. Many consumers plan renovations every year to their home to modernize them and to make them more attractive for sales purposes. This is a pretty common question for consumers all over the country.

Interest Only Mortgages

Many people like the idea of only paying interest on a mortgage since it means our monthly payments are lower as a result. While they do have this advantage there are a number of issues to consider before you leap to this solution.

First of all the interest rate is fixed usually for a short period of time, usually for a one month period. The interest rate is set based on the prevailing bank rate and can fluctuate a great deal over time. If you are concerned about increasing rates, then this may not be the best approach for you.

Secondly, paying interest only really means that you never repay the principal on your mortgage. As long as you are ok with this approach, then there is no problem. However most people want to be mortgage free at some time in their lives.

We received a question about interest only mortgages from a reader and will answer his questions in our next post about interest only mortgages.

Question to Debt Counselor::Interest Only Mortgage Loan

I am considering an interest only mortgage for my home. We are renewing our mortgage and have this option to consider. It is appealing since the payments will be less than they currently are. We can use all of the cash flow that we can at the moment, since our bills for every day living expenses have gone up so much. The other thing we like is that we can pay down or draw on the interest free mortgage at any time up to an established limit that is based on the equity in our home and the approved limits by the bank.

Do you currently have a mortgage? :: yes

Home/Mortgage Loan Amount :: $75,000, but we would like to increase it to $100.000